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Bargain Shares: A Ben Graham value play

A well-managed Scottish housebuilder has made another astute acquisition and is well placed to deliver strong earnings growth, factors that are simply not reflected in a prospective price/earnings ratio of 5.8, forward dividend yield of 6.3 per cent and 13 per cent share price discount to book value.
Bargain Shares: A Ben Graham value play

•    £46.3mn acquisition of Scottish housebuilding and timber operations of Mactaggart & Mickel
•    Analysts upgrade EPS estimates by 5 and 10 per cent to 20.5p and 22.8p for 2022/23 and 2023/24 financial years
•    Closing net debt of £39mn at 31 May 2022 is £11mn lower than analyst forecasts

Springfield Properties (SPR:118p), a housebuilder focused on developing a mix of private and affordable housing in Scotland, is acquiring the Scottish housebuilding and timber operations of Mactaggart & Mickel. The premium brand housebuilder primarily targets the three- to five-bedroom private home market in highly desirable locations centred around Glasgow and Edinburgh, and complements Springfield’s previous acquisitions of Dawn Homes, Walker Group and Tulloch Homes.

The £46.3mn total consideration comprises a cash payment of £10.5mn on completion and deferred cash payments of £35.8mn spread over the next five years. The acquisition includes 17 sites, of which 16 have planning consent, and adds 700 plots with a gross development value of £230mn to the group’s land bank. The deal also includes Mactaggart & Mickel’s timber frame factory near Glasgow, thus enabling Springfield to source more supply for its Central Belt activities than from its existing facility in Elgin. In addition, Springfield has established a strategic alliance with Mactaggart & Mickel Group to enable the group the opportunity to make future acquisitions from the latter's 2,300-acre remaining land bank.

The effect of the acquisition is to add 175 homes to Springfield’s estimated output for the 12 months to 31 May 2023, implying 1,555 completions or almost 300 more than in the 2021/22 financial year. Moreover, with a higher proportion of higher value property in the mix – Springfield’s average selling price is expected to rise from £205,000 in the financial year just ended to almost £230,000 this year, says analyst Alastair Stewart at Progressive Equity Research – and gross margin stable at 18 per cent, then expect both pre-tax profit and revenue to rise by more than a third to £29.9mn and £357mn, respectively. On this basis, earnings per share (EPS) jumps from 15.9p forecast for the 2021/22 financial to 20.2p (5 per cent upgrade) in 2022/23.

It’s worth noting that Springfield’s closing net debt of £39mn at 31 May 2022 was materially (£11mn) lower than Stewart had been forecasting, implying balance sheet gearing of 27 per cent. Importantly, the deferred cash consideration will be funded from internal cash flow, both house broker Singer Markets and Progressive Equity expect operating cash flow of £25mn in the new financial year and free cash flow of £16mn to £17mn, implying a free cash flow yield of 12 per cent. 

Furthermore, with Scotland’s unemployment rates at a record low – only 88,000 workers are unemployed across a total workforce of 2.77mn – the country’s new build housing supply failing to keep up with demand, new build prices still affordable, and the Scottish missive system adding to housebuilders’ sales visibility, then the group looks well placed to continue delivering, as has been the case since I first suggested buying the shares in my 2021 Bargain Share Portfolio.

Admittedly, the holding is underwater – a total return of minus 8.4 per cent compares unfavourably with the portfolio’s 17.1 per cent total return – albeit the Aim-traded shares have performed far better than the FTSE Aim All-Share index, which has declined 25 per cent in the same 16-month holding period.

2021 Bargain Shares Portfolio Performance
Company nameTIDMMarketOpening offer price 05.02.21Bid price 22.06.22 DividendsPercentage change (%)
Vietnam Holding (see note one)VNHMain201.4p302p0.0p60.4%
Wynnstay GroupWYNAim424p642p25.5p57.4%
San Leon EnergySLEAim27.5p40.75p0.0p48.2%
Ramsdens RFXAim142.8p198p1.2p39.5%
Duke RoyaltyDUKEAim29p35p2.95p30.9%
Canadian General InvestmentsCGIMain3,611c3,325c134c-4.2%
AnexoANXAim136.9p124p3.0p-7.2%
Springfield PropertiesSPRAim135.6p117p7.25p-8.4%
Downing Strategic Micro-Cap DSMMain69p62p1.1p-8.6%
Arix BioscienceARIXMain177p112p0.0p-36.7%
Average      17.1%
FTSE All-Share Total Return  7,135 7,916 10.9%
FTSE AIM All-Share Total Return  1,384 1,039 -25.0%

Note One: Simon recommended tendering 30 per cent of holdings in Vietnam Holdings at US$4.4528 (322.3p) a share, and tendering 3.9 per cent in the excess application ('Exploiting a tender offer', 4 August 2021), with a view to buying back the tendered shares at the lower market price (284p offer price on 13 and 14 September 2021) when the cash distribution was made during the week of 13 September 2021. Total return reflects these transactions which have reduced the entry point to 188.3p a share.

Source: London Stock Exchange. 

The fact that Springfield’s share price failed to react to news of the acquisition even though analysts upgraded their EPS estimates is more a reflection of the gloom in financial markets right now than the deal itself. A prospective price/earnings ratio of 5.8, forward dividend yield of 6.3 per cent and 13 per cent share price discount to estimated net asset value of 135p per share (at 31 May 2023) all point to a heightened level of risk aversion.

Moreover, Springfield’s modest forward PE ratio and price-to-book value for the 2022/23 financial year are both 13 per cent lower than the average for the 10 sector peers in the FTSE 350 even though the group is expected to deliver a higher level of earnings growth (41 per cent) across the next two financial years. Buy.

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